Answer: A government bond yield as a proxy for the risk-free rate

## Explanation The historical approach to estimating equity risk premiums (ERP) uses **a government bond yield as a proxy for the risk-free rate**. ### Key Points: - **Historical Approach**: This method calculates ERP by comparing the historical returns of equities with the historical returns of risk-free assets (typically government bonds). - **Government Bond Yield**: Long-term government bond yields are commonly used as the risk-free rate benchmark in this calculation. - **ERP Calculation**: ERP = Historical equity returns - Historical risk-free rate (government bond yield) ### Why Other Options Are Incorrect: - **Macroeconomic models (A)**: These are used in forward-looking approaches, not historical approaches. - **Dividend discount models (B)**: These are used in implied ERP calculations, not historical ERP calculations. ### Historical ERP Formula: ``` ERP = Average historical stock returns - Average historical government bond returns ``` This approach relies on actual historical data rather than forward-looking estimates or models.

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